Julian Knight: Which bank will blink first in the penalty fees standoff?

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The Independent Online

Lloyds TSB lowered its overdraft penalty fees last week. Customers who go overdrawn without permission will no longer have to pay £30 a day; instead they will be penalised by between £6 and £20 a day. As for the one-off penalty fee for having a cheque or direct debit bounced, this falls from £35 to £20.

This is still way over the odds, when you consider that consumer groups reckon the actual cost to a bank of bouncing a cheque is less than £2. Lloyds also said it would send a text to customers who are slipping into the red, which is, quite frankly, just a gimmick.

Judging by the reaction of consumer groups such as Which? and the message boards on the website of the Consumer Action Group, Lloyds' move has done nothing to assuage the anger of the tens of thousands of people who have sued or are suing their banks for the return of unauthorised overdraft charges. Nevertheless, this could well be the first chink of light in the penalty charges standoff that has seen consumers and banks at loggerheads for the best part of two years.

Going back a few months and bank chiefs were issuing dire warnings about the end of so-called free banking if they were not allowed to penalise people who go into unauthorised overdraft. But ever since the Office of Fair Trading (OFT) and the banks agreed to go to court to get a ruling on whether penalty fees are legal, this dangerous mood music has stopped. The case, due to start in the High Court next year, has focused minds in banking boardrooms.

For starters, the banks know that when they take on the regulators, they tend to lose. A prime example of this has been their attempt to overturn section 75 of the Consumer Credit Act. Some banks want to see the scrapping of the automatic protection this offers to credit card customers purchasing goods and services overseas that cost more than £100. The OFT and the courts disagree. The banking industry may be starting to feel that a similar protracted fight with regulators and consumers over penalty fees could be highly damaging. And there is always the temptation for a bank to break cover and slash its penalty charges so to appear the honest John of the market. Lloyds TSB has made a halting move in this direction but expect at least one other bank to go for it soon and cut its charges substantially.

Ultimately, consumers may not have to rely on a court case to overturn the current system of penalty fees – the banks may tear it down for them.

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